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![Page 1: Confidential and Proprietary IIA Detroit Chapter Meeting May 13, 2008 An Introductory Roadmap to IFRS Convergence.](https://reader035.fdocuments.net/reader035/viewer/2022062805/5697bfeb1a28abf838cb7d07/html5/thumbnails/1.jpg)
Confidential and Proprietary
IIA Detroit Chapter Meeting May 13, 2008
An IntroductoryRoadmap to IFRS Convergence
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Confidential and Proprietary
Agenda
• How We Got Here
• Seeking a Global Standard– Convergence or Adoption of IFRS
• Differences between IFRS & US GAAP
• Considerations, Benefits & Opportunities
• Be Proactive and Reap the Benefits
• Web Based Resources
• Q&A
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Confidential and Proprietary
New Terminology
• IASB – International Accounting Standards Board
• IFRS – International Financial Reporting Standards (formerly IAS – International Accounting Standards)
• SAC – Standards Advisory Council (external)
• IFRIC – International Financial Reporting Interpretations Committee (formerly SIC – Standards Interpretation Committee)
• Convergence – Effort by the FASB and IASB to make US GAAP & IFRS more compatible
• Roadmap – SEC’s plan and timetable for acceptance of IFRS in the US…will be issued later this year
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Confidential and Proprietary
IASB Structure
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Confidential and Proprietary
How We Got Here
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Confidential and Proprietary
2002 “Norwalk Agreement”Reaffirmed in 2005
• The FASB and IASB affirmed their commitment to:
– Converge accounting standards through the development of high quality, common standards
– Eliminate significant differences between the standards by developing new common standards that improve financial information reported to investors
– Promote convergence by replacing weaker standards with stronger standards
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Confidential and Proprietary
SEC – 2007 IFRS Activity
• IFRS Reconciliation to US GAAP– March: SEC Roundtable on US GAAP reconciliation for
IFRS filers
– July: SEC Proposal eliminating IFRS reconciliation to US GAAP for foreign private issuers
– November: IFRS to US GAAP reconciliation eliminated
• Use of IFRS by US Companies– August: SEC Concept Release on allowing use of IFRS
for US companies
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Confidential and Proprietary
Public Comments on SEC’sIFRS Concept Release
• Establish a mandatory IFRS conversion date for US issuers
• The coexistence of US GAAP & IFRS should be temporary
• IFRS standards are currently of sufficient quality to be accepted as a basis of financial reporting by US issuers
• For practical reasons, IFRS should be the single set of high-quality, globally-accepted accounting standards
• Allow US issuers the same option foreign issuers have, to file statements with the SEC using IFRS
• No advantage to convert for smaller issuers with only US operations
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Confidential and Proprietary
SEC – 2008 IFRS Agenda
• Propose a new “Roadmap” that lays out a schedule for the adoption of IFRS
• The new “Roadmap” will be conditioned on appropriate convergence milestones
• Pursue mutual recognition of securities market regulation
• Lower the barriers to the efficient operation of the world’s capital markets– by rationalizing the different regulatory approaches
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Confidential and Proprietary
• IFRS is now accepted or required in over 100 countries, including nine of top 10 capital markets
• There is strong demand from investors and multinational companies for a uniform set of international accounting standards
• EU recently completed conversion to IFRS three years after a European Commission mandate
• Big 4 accounting firms favored conversion from US GAAP to IFRS in their comments to SEC
Other Events Supporting IFRS
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Confidential and Proprietary
Not “If” but “When”?
2008 2009 2010 2011 2012 2013
2009 to 2011?
2011 to 2013?EU Adopted
IFRS in 3 Years
Can US Adopt IFRS in 3 Years?
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Confidential and Proprietary
Seeking a Global Standard
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Confidential and Proprietary
• Recognizing the demand, the IASB & FASB have been working toward convergence of US and international accounting standards
• However an alternate path has emerged
Demand and Alternatives
Convergence
Adoption of IFRSGlobal Standards
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Confidential and Proprietary
Convergence ≠ Sameness
• US GAAP
– Rules based
– Based on a GAAP hierarchy (level A – D)
– Primary accounting standard setting body is the FASB
– Accounting guidance and interpretation is provided by several bodies e.g., FASB, SEC, AICPA etc.
• IFRS
– Principles based
– No hierarchy, consists of IASs, IFRSs & interpretations
– Standards and interpretations approved by the IASB
– Interpretations of IFRIC and its predecessor the SIC
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Confidential and Proprietary
Convergence ≠ Sameness
• Convergence = compatibility by eliminating material differences
• Open items– FASB and IASB continue to have differences in in
major accounting areas
– The FASB and IASB disagree over the project agenda, scope of rulemaking projects, changes to be made and how they should be made
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Confidential and Proprietary
Adoption of IFRS
• Adoption of IFRS = One set of high quality globally accepted set of standards
• Open items– No prescribed MD&A equivalent
– Governance surrounding IASB activities
– IASB funding
– Jurisdictional versions of IFRS are being used
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Confidential and Proprietary
DifferencesBetween IFRS & US GAAP
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Confidential and Proprietary
IFRS & US GAAP Differences
• Financial Statement Presentation
• Consolidations, Equity Methodand Joint Ventures
• Business Combinations
• Inventory
• Intangible Assets
• Long-Lived Assets
• Impairment of Assets
• Leases
• Financial Instruments
• Foreign Currency Issues
• Income Taxes
• Provisions and Contingencies
• Revenue Recognition
• Share Based Payments
• Employee Benefits
• Segment Reporting
• Earnings Per Share
• Interim Financial Reporting
• Subsequent Events
• Related Parties
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Confidential and Proprietary
Financial Statement Presentation
• US GAAP – Deferred taxes shown
current & non-current
– Expenses must be shown by function
– Financial instruments with debt & equity components must be classified as liabilities
– Extraordinary items shown as unusual & infrequent
• IFRS– Deferred Taxes shown non-
current only
– Expenses may be shown by function or nature. If function shown must disclose nature in footnotes
– Financial instruments with debt & equity components – focus on settlement method
– Extraordinary item presentation prohibited
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Confidential and Proprietary
• US GAAP – Presentation of non-
controlling interest shown between liabilities and equity (prior to effective date of SFAS 160)
– Equity method investments: may account for at fair value (SFAS 159). Equity method required if don’t choose fair value.
• IFRS– Presentation of non-
controlling interest shown as a separate component of equity
– Equity method investments: requires equity method (IAS 28). If separate target entity financial statements are presented, can use fair value.
Consolidations & Equity Method
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Confidential and Proprietary
Business Combinations
• US GAAP – Fair value = price that would
be received to sell an assets or paid to transfer a liability- market participant focus
– Recognition of an asset or liability if the terms of an operating lease are favorable or unfavorable compared to market
– Acquire <100% – Identifiable assets & non-controlling interests recognized at fair value (FAS 141R)
• IFRS– Fair value = amount for which
an asset could be exchanged, or a liability settled.
– No recognition of assets or liabilities for operating leases with favorable or unfavorable terms
– Acquire <100% – Identifiable assets recognized at full fair value. Non-controlling interest measured at fair value OR proportionate share of fair value, exclusive of goodwill (IAS 27)
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Confidential and Proprietary
Inventory
• US GAAP – Last In, First Out
– Recovery of previous write-down is prohibited
• IFRS– LIFO Prohibited
– Write-downs must be recovered if there is an increase in net realizable value
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Confidential and Proprietary
Financial Instruments
• US GAAP– Fair Value Measurement –
based on exit price to sell asset or transfer liability
– Financial instruments can be measured at fair value except for specific ineligible financial assets & liabilities
– May recognize day one gains on financial instruments reported at fair value (even when all inputs to the measurement model are not observable)
• IFRS– Fair Value Measurement –Fair
value is generally the amount that the asset could be exchanged or liability transferred (entry price)
– Financial instruments can be measured at fair value provided certain criteria are met
– Day one gains are recognized only when all inputs to the measurement model are observable
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Confidential and Proprietary
Revenue Recognition
• US GAAP – Products:
Delivery, sale occurred, fee fixed, fee collectable, no contingencies
– Services: delivery, sale occurred, fee fixed, fee collectable, no contingencies
– Construction Contracts: Percentage of completion or Completed Contract
• IFRS– Products:
Risk/reward transferred, buyer controls goods, fee measurable, benefits flow to seller
– Services:LT contract accounting, including consideration of % complete
– Construction Contracts: Percentage of completion or cost recovery method only
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Confidential and Proprietary
Considerations, Benefits and Opportunities
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Confidential and Proprietary
Considerations
• Internal Controls– Initial conversion may be viewed as a significant change in
the internal control environment and may require disclosure under SOX §302
– Conversion could result in changes to significant accounts which could have an impact on:
• Current SOX §404 scoping methodology and processes
• Current composition of key controls
– Existing ICFR process documentation will have to be re-documented to reflect IFRS induced accounting and financial reporting changes
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Confidential and Proprietary
Considerations
• Internal Controls (cont)– New internal controls will need to be designed and
implemented to ensure that IFRS conversion is complete and accurate
– Additional internal controls may need to be designed to satisfy temporary dual reporting requirements
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Confidential and Proprietary
Consideration
• IT internal controls– The IT control environment may change if the current IT
infrastructure does not easily provide mapping to IFRS information
– New IT controls will need to be designed to manage IFRS data conversions
– IT application control activities may change as a result of accounting system changes e.g. COA and consolidation entries
– Data privacy controls may need to be reviewed from a global perspective
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Confidential and Proprietary
• Corporate Governance– Tone at the top - support of Senior Management
– Impacted business units and corporate functions are accountable for implementing changes in their area
– Reviewers will need the knowledge and authority to police sufficiency of disclosures
– Adequacy of current process and policies
– Sufficiency of compensation schemes and performance evaluation
Considerations
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Confidential and Proprietary
• Training and Communication– Shareholders, investors, analysts and rating
agencies
– Audit Committee, senior executives, business units and other corporate functions regarding the flexible nature of IFRS
– Periodic transfer of knowledge from external consultants and sub-contractors throughout transition
– Continuous professional education for employees
Considerations
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Confidential and Proprietary
Considerations
• Expertise – Lack of auditor scrutiny skills
– Internal resources
– Need for assistance from external consultants
• Regulatory Challenges– SEC and foreign regulation scrutiny
– Determining the “correct” interpretation of standards and resolving differences with auditors
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Confidential and Proprietary
Considerations
• FAS 109 vs. IAS12 Income Taxes
– Currently 15-20 differences between
• Anticipated high-impact areas
– LIFO
– Accounting for Revenue
– Asset Impairments
– Hedging activities
– Stock-based compensation
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Confidential and Proprietary
Considerations
• Other
– Contractual obligations
– Debt covenants & hedging contracts
– Lenders may require conversion
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Confidential and Proprietary
Benefits of Conversion
• Reduces cost of raising capital
• Improves transparency of business transaction reporting
• Reduces compliance costs for multinational companies by creating synergies
• Reduces complexity resulting in fewer potential accounting errors
• Increases US and worldwide competitiveness
• Improved Comparability(?)
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Confidential and Proprietary
Opportunities
• Centralize finance and control functions
• Streamline accounting & financial reporting
• Expand merger & acquisition activities
• Refine existing policies & procedures
• Train employees in accounting policies & procedures
• Expand Stock and Debt Offerings
• Streamlines tax strategy and planning development
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Confidential and Proprietary
Be Proactive and Reap the Benefits
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Confidential and Proprietary
Estimated Cost of Implementation
• Estimated cost of preparing the first IFRS consolidated financial statements of publicly traded companies is:
• Estimated costs of preparing IFRS consolidated financial statements in following financial years is:
N=162
Source: EU implementation of IFRS and the Fair Value Directive, October 2007
Turnover Cost Companies with turnover below USD777m
0.31% of turnover
Companies with turnover from USD777m to USD7,773m
0.05% of turnover
Companies with turnover above USD7,773m 0.05% of turnover
Turnover Cost Companies with turnover below USD777m
0.06% of turnover
Companies with turnover from USD777m to USD7,773m
0.01% of turnover
Companies with turnover above USD7,773m 0.008% of turnover
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Confidential and Proprietary
Lessons Learned
N=162
Source: EU implementation of IFRS and the Fair Value Directive, October 2007
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Confidential and Proprietary
Lessons Learned
• Set a firm adoption date for the company to encourage employee/participant buy-in.
• Implement some conversion steps along the way to reduce procrastination (e.g. proformas, policy review)
• Consider IFRS only in determining accounting policies (to avoid adopting a US flavor of IFRS)
• Audit fees were the 2nd and 3rd highest costs. Support provided by auditors with the introduction of IFRS included:– giving advice on selection of accounting policies;
– providing model IFRS financial statements;
– issuing publications/guidance notes;
– giving training seminars; and
– giving advice on developing accounting policies
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Confidential and Proprietary
IFRS Project Team Composition
• 32% - External Consultants played advisory role
• 30% - Impacted Business Units/Corporate Function were represented in relevant project team
• 27% - Impacted Business Units/Corporate Function were represented in central project team
• 11% - External Consultants played a major role or led in the project team
• 0% - Sub-contractors were used to implement changes
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Confidential and Proprietary
Extent of System Changes Required
• 40% - Implement new information systems
• 32% - Modified existing information systems
• 8% - Plan to implement new information systems
• 4% - Plan to modify existing information systems
• 16% - Do not plan to modify existing information systems
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Confidential and Proprietary
• Get educated and be proactive to stay educated
• Look for opportunities to build your team expertise
• Educate your internal and external stakeholders
• Establish a Project Management Plan, including milestones
Get Ahead of the Game
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Confidential and Proprietary
• Identify project resources (company wide representation)
Get Ahead of the Game
Accounting &
Reporting
IT systems
Operations &
Processes
Human Resources
Governance
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Confidential and Proprietary
Get Ahead of the Game
• Conduct a preliminary business impact assessment– Financial Results - SOX 404 Compliance
– Processes - Risk Management
– Policies
• Actively manage project issues
• Utilize change management discipline
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Confidential and Proprietary
Web Based Resources:
• Website Resources
– www.iasb.org
– www.fasb.org
– www.sec.gov
– www.cfo.com
• Website Resources– www.aicpa.org– www.complianceweek.com– www.accountingweb.com– www.executiveboard.com
• Jefferson Wells and Regional IFRS SME
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Confidential and Proprietary
Comments and Discussion